EXPANDING ACCESS TO FINANCE Finance in Focus FOR SMALL-SCALE BUSINESSES SECURED TRANSACTIONS REFORM: AN INDONESIA CASE STUDY Knowledge Notes in partnership with EXECUTIVE SUMMARY A lack of access to finance has been one of the biggest The online collateral registry for secured lending impediments to the development and growth of the against movable collateral was launched in small-scale business sector in Indonesia. While micro, Indonesia on February 16, 2013. Since then the small and medium-sized enterprises (MSMEs) account registry has facilitated over $30 billion in financing for for almost all employment in Indonesia (97 percent), more than 200,000 small-scale businesses. In total, the sector as a whole accounts for just about 57 there were 19.3 million registrations of corporates, percent of Gross National Product. Surveys suggest SMEs, micro-businesses, and consumers in the that one of the main constraints on the growth of the three years since the launch, compared to only sector is a lack of access to finance, with almost half of three million registrations in total during the ten Indonesian MSMEs citing access to finance as the top years of operation of the manual registration system constraint to business growth1. that preceded it. In 2012 the World Bank Group (WBG), in partnership This case study shows how the World Bank Group’s with Switzerland and Japan, engaged with the specialist team in Indonesia engaged with the Government of Indonesia to improve access to government to promote an enabling environment and finance for the small-scale sector by enabling the develop a sound secured transactions infrastructure use of movable collateral for formal lending. The use to increase access to finance for the MSME sector. It of movable collateral, such as vehicles, machinery, specifically highlights the importance of establishing equipment, inventory or livestock, make it possible for a close working relationship between the project team enterprises and individuals who lack fixed collateral, and the champion for secured transaction reform such as land and property, to access finance. It within the government partner, and to maintain this also supports the growth of the financial sector, as it relationship despite changes in staff. It also shows promotes portfolio diversification. how important it is for the responsible government agency to commit upfront to reform. The use of movable collateral requires a legislative framework for secured transactions and the This case study was prepared by Yopie Fahmi, establishment of a collateral registry. The World Project Manager; Anastassiya Marina, Senior Bank Group’s secured transactions specialists have Operations Officer; Aria Suyudi, STCR Legal helped set up such secured transactions regimes Consultant; Elaine MacEachern, Global Specialist, in 25 countries around the world as of August 2016, Secured Transactions & Collateral Registries; Gillette helping to increase access to finance to boost Conner, Senior Knowledge Officer; Anna Koblanck, inclusive economic growth and shared prosperity. The Communications Officer; and Patrick Carpenter, collateral registry in Indonesia was launched initially Design and Layout Consultant. The authors have in 2000 with a manual registration process, while the benefited from the support of Tony Lythgoe, Practice online version was launched in February 2013. The Manager and Mahesh Uttamchandani, Global Lead transformation from manual to online resulted in a for Credit Infrastructure of the Finance and Markets huge increase in the number of total registrations, and Global Practice. Special gratitude is to the Swiss serves as a good example for others to follow. Government and our partners in SECO and the Government of Japan. 1 World Bank Enterprise Survey, 2009 (exact figure 48 percent) AZERBAIJAN: EXPANDING LEVERAGING ACCESS POSTAL TO FINANCE FOR NETWORK SMALL-SCALE FORTHROUGH BUSINESSES FINANCIAL ANDTRANSACTIONS SECURED SOCIAL INCLUSION REFORM EXPANDING ACCESS TO FINANCE FOR SMALL-SCALE BUSINESSES THROUGH SECURED TRANSACTIONS REFORM: INDONESIA CASE STUDY INTRODUCTION The term secured transactions refers to credit transactions where a creditor holds an interest in a debtor’s movable property (collateral) to secure a loan or a debt obligation. The interest in movable property is also referred to as security interest, pledge or charge. Collateral facilitates credit by reducing the potential loss that lenders face from non-payment. While land and buildings are widely accepted as collateral for loans, the use of movable collateral such as inventory, accounts receivable, livestock, crops, equipment, and machinery, is much less common due to a lack of adequate regulatory frameworks. Reforming the movable collateral framework thus enables businesses to leverage the greatest part of their assets and obtain credit for growth. While a secured transactions regime has existed in Indonesia since 1999, and transactions that rested on secured interests of some type dates back to the colonial civil code, the World Bank Group and the Government of Indonesia recognized a need to improve existing legislation and modernize the system to enhance efficiency, transparency, and accountability in order to facilitate greater access to finance for the small-scale business sector. The project aligned with the economic development priorities of Indonesia, and with the mission of IFC and the World Bank to eliminate poverty and promote shared prosperity through private sector development. Improving access to finance for micro, small and medium-sized businesses is expected to strengthen economic growth and job creation. A strong and modern secured transactions law regime is also a critical element under the annual IFC/ World Bank global survey on Ease of Doing Business. Since 2005, the Government of Indonesia has worked to promote the country’s trade and competitiveness through the World Bank Group Doing Business reform framework. Access to and provision of credit is one of the areas promoted through the framework, which includes an assessment of a country’s ability to comply with international best practice in modern secured transactions law regime. Until the Bank Group team engaged with Indonesia on secured transactions reform, the country had made limited progress in this area due to the complexity of legal reform, difficulties in cross-sectoral coordination, and a lack of knowledge of international best practices. Some of the challenges that were apparent in the existing secured transactions framework at the outset of the project included fragmentation and deficiencies in the legal framework; inefficient handling of the registration office; and a lack of understanding and coordination among a variety of stakeholders. In order to help resolve these challenges, the team initially worked to develop a conducive environment for reform, then worked to address infrastructure deficiencies and establish a solid framework for the collateral registry, and finally to promote the use of movable collateral among micro, small and medium-sized businesses. 3 INDONESIA CASE STUDY AZERBAIJAN: LEVERAGING POSTAL NETWORK FOR FINANCIAL AND SOCIAL INCLUSION DEVELOPMENT CHALLENGE While there are 57.9 million micro, small, and medium- 1. The legal/institutional framework was based on sized enterprises (MSMEs) in Indonesia, accounting for 97.2 the Civil Code, the Fiducia Security Act3, and the percent of employment in the country, the MSME sector only Companies Act, along with other related legislation. contributes 56.7 percent of the country’s GDP. According to the This framework left a number of reasons for financial World Bank Group’s 2015 Enterprise Survey, access to finance institutions not to lend to MSMEs against movable assets is counted as one of the main obstacles to growth. The MSME as collateral, such as: (i) the legal status of MSMEs was finance gap is estimated to be $330 billion, with the largest gap unclear; (ii) the existence of information asymmetries; in the agricultural and agribusiness sectors at $240 billion. This (iii) conflicting provisions and fragmentation within equates to approximately 37 percent of Indonesia’s GDP in 2012. the legal framework; (iv) problems complying with the principles of publication; and (v) unnecessary While the majority of MSMEs hold movable assets, financial complexity and burdensome requirements, including institutions in Indonesia generally require borrowers to put up restrictions on the disposition of the collateral. fixed assets for collateral. Options tend to be limited to a few select categories of assets, mainly real estate, vehicles, and 2. Financial institutions had low confidence in the actors heavy equipment. Movable assets-based lending could offer of the registration system for movable assets. The a significant opportunity to bridge the MSME financing gap official movable collateral registry, Fiducia, had 33 in Indonesia, with estimates that the demand for finance could regional and 157 satellite offices that lacked any real be met even if banks offer an extremely low loan-to-value integration, technology, tools and standards. Lack of of 35-40 percent against movable assets. By relying less on transparency and accountability in the management of immovable and real estate collateral, banks would also be able these registries also resulted in high transaction costs to grow lending portfolios and achieve credit diversification. that burdened the users. The weaknesses in Indonesia’s legal, regulatory, and 3. There was limited diversification of the type of institutional framework for secured transactions helped explain collateral accepted, with lending based on movable the reluctance of the financial sector to extend credit backed by collateral mostly concentrated to motor vehicles and movable assets2: heavy equipment. There were several reasons for this: 2 IFC 2 Legal Diagnostics: IFC Legal Diagnostics: Increasing Access to Increasing Access to Credit in Indonesia Credit in Indonesia through3Secured title of the Reform, Transactions This is the 2009, updated law that governs 2014 security interests over through 3 This is Secured the title Transactions Reform, of the law that governs2009, updated security 2014over movablesmovables interests in Indonesia. in Indonesia. 4 EXPANDING ACCESS TO FINANCE FOR SMALL-SCALE BUSINESSES THROUGH SECURED TRANSACTIONS REFORM (i) Bank Indonesia’s methodology for calculating risk- transactions which involved security interests outside the weighted assets for different classes of assets; (ii) banks’ scope of the Fiduciary Security Act. While the Fiduciary internal lending policies of collateralizing against a few Security Act (Law no. 42/1999) contains a significant number select categories of assets; (iii) banks’ lack of capacity to of provisions that are in line with current international value specific types of movable collateral; (iv) historically best practices for secured transactions, there was scope negative experiences dealing with movables lending dating for improvement, such as transparency and accountability back to the Asian banking crisis of 2008; and (v) bank mechanisms, and requirements to meet same-day certificate employees with relatively little knowledge and experience publication as stipulated by the law. in lending against movable assets. While the Fiducia Registry had been in operation since 2000, In summary, without the appropriate risk-mitigation tools its 33 regional and 157 satellite offices operated completely needed for a robust movables lending industry, such as a separately. Its manual registration process was inefficient sound legal and regulatory framework, a transparent and and it sometimes took weeks or months to complete a accessible registry system, and industry “know how”, registration, much longer than the same-day certificate it would have remained difficult to encourage financial publication benchmark mandated by the Fiduciary Security institutions to lend to MSMEs using movable assets as Act, offering very few incentives for creditors to rely on collateral. the system. Many creditors even refrained from registering security interests, and only registered if the borrower was APPROACH TAKEN TO THE DEVELOPMENT going to default on the loan. As a result, after the first ten CHALLENGE years of operation the Fiducia Security Registry had only three million movable items registered on the database, The World Bank Group approached the development of a compared to an average of six million registrations per year solution with the above challenges in mind. First, the Bank after the new online system was introduced. Group team assessed the legal and regulatory framework, including the Fiducia Registry (movable collateral registry) In 2009, the Bank Group initiated discussions with the system4. The secured transactions system was based on Ministry of Law and Human Rights (the Ministry), which the Fiduciary Security Act (Law no. 42/1999) as well is legally mandated to manage the Fiducia Registration as provisions in the old colonial Civil Code for some Office. This dialogue focused on the legal and regulatory 4 4 IFC Legal Diagnostics: Increasing Access to Credit in Indonesia through Secured Transactions Reform, 2009, updated 2014 5 INDONESIA CASE AZERBAIJAN: STUDY LEVERAGING POSTAL NETWORK FOR FINANCIAL AND SOCIAL INCLUSION improvements as well as the modernization of the Fiducia Human Rights to visit the Australian Financial Services Registry. But it was in 2012 that the Ministry of Law and Authority (AFSA, formerly Insolvency and Trustee Human Rights took steps to reform its Fiducia systems Service Australia), under the Australia Attorney and processes, when a Ministry of Finance decree made General’s Office. The Ministry introduced several new it compulsory for multi-finance companies to register changes in February 2013, through which it decreased their fiducia-secured financing in the Fiducia Registry, the role of its regional offices through a centralized thereby putting a significant strain on the paper-based and technology solution. The visit was part of the decentralized registrations. Ministry’s effort to understand how other jurisdictions implemented this reform without disruption to ongoing The team quickly acted to support this shift in the Ministry services. The visit set the stage for a mindset of change of Law and Human Rights’ priorities and assisted the at the Ministry. Ministry in setting up an Ease of Doing Business Reforms Task Force (Task Force), by linking the reform agenda for 3. As a follow-up to the Australia visit, the World Bank secured transactions with the existing initiative to pursue Group facilitated a visit to Service Ontario in Canada Doing Business reforms. The Task Force looked into the in October 2013. The Chairman of the Task Force modernization of the movable collateral registry along believed that in order to have the change embraced with business registry reforms. In August 2013 and April by other members of the Task Force, these members 2014, the World Bank Group and the Ministry of Law and needed to witness and hear first-hand from other public Human Rights signed memorandums of understanding and service entities about what to expect. The Task Force cooperation agreements that outlined the broad scope of members came back to Indonesia, motivated and ready the Bank Group’s support to modernize the regulatory and to introduce and adopt many of the things they learned institutional framework for movables financing. from the visits. The Task Force members were able to visualize how some of these changes could be deployed in the Indonesian context and this created a sense that it could be possible, and that similar challenges faced FOCUS ON THE ENABLING ENVIRONMENT in another jurisdiction could be overcome with proper AND INFRASTRUCTURE planning, people, resources, and tools. As its first priority, the team focused on the Fiducia Registry 4. The World Bank Group also supported the Ministry modernization and the respective regulatory reforms. It was of Law and Human Rights’ participation in the APEC clear that without a legal and sound registration infrastructure, Forum in Shanghai (March 2014), during which the any promotion of movables finance practices would not yield Ministry Director General endorsed the adoption meaningful results with financial institutions. of the technical specification and service delivery recommendations. Under the agreements with the Ministry of Law and Human Rights, the World Bank Group supported its partner in a wide 5. The improved Fiducia Online Registry launched in range of activities over four years: March 2014, and the launch was attended by more than 1,000 members of the Indonesian Notary Association. 1. Numerous discussions with, and recommendations The registry incorporated the World Bank Group to, the Ease of Doing Business Reforms Task Force recommendations, which converted the registry into a helped to inform the regulatory reform agenda related notice-based registry, reducing processing time from to movable collateral and provide in-depth support to weeks to seven minutes. Following the launch, the the Ministry of Law and Human Rights’ regulatory Ministry of Law and Human Rights received a public reform initiative. As a result, in April 2015, the service innovation award for the online system. Ministry amended Government Regulation No. 86 of 2000 concerning the Procedures for Movable Collateral 6. An assessment was done 12 months after the launch, Registration. The new regulation provided a stronger in two major regional offices: Jakarta and West Java. It legal basis for the transition to an online registry by focused on implementation of the Fiducia registration, mandating all Fiducia registry-related processes to be infrastructure, and problems that were encountered. A done via the Fiducia Online system. gap analysis report with functional specifications and a number of other technical recommendations fed into 2. In June 2013, the Bank Group sponsored three top the development of subsequent Fiducia Online versions, management officials from the Ministry of Law and with the latest release of version 4 in March 2016. 6 INDONESIA: EXPANDINGEXPANDING TO FINANCE ACCESS FOR ACCESS TO FINANCE FOR MSMES SMALL-SCALE THROUGH BUSINESSES SECURED THROUGH TRANSACTIONS TRANSACTIONSREFORM SECURED REFORM 7. The team supported a wide sensitization campaign Discussions with the financial sector regulators and financial by the Ministry of Law and Human Rights to inform institutions in early 2016 highlighted that the constraints on users, financial regulators, and the public on the Fiducia increased lending to MSMEs against movable collateral is Registry modernization. This campaign included not the financial sector as such, but some limitations of the establishing standardized materials and information; functionality of the registry and the legislative framework. partnering with the government for seven events in “We don’t need help to innovate”, quoted one of the major cities nationwide to disseminate the reform, surveyed banks. Financial institutions continue to ask for reaching a total of 2800 participants from MSMEs, more modern functions in the Fiducia Registry, such as banks, finance companies, and notaries; and supporting the capacity that no registration can be put on assets that capacity building of over 130 senior officials of the have already been pledged as collateral and the automatic Ministry of Law and Human Rights. deregistering of collateralized assets when a loan has been repaid. In the use of inventory as collateral, there is 8. Since January 2016, when Joko Widodo, President also a need for flexible registration that allows different of Indonesia, set an ambitious target of improving objects (collateral) in the same address to be pledged as Indonesia’s Doing Business position from 109 to 40, collateral with different transactions. The other critical the Ministry of Law and Human Rights, in partnership need is the mechanism for execution of repossession based with the Bank Group, has been able to promote critical on the interests entered in the Fiducia Registry. Without an amendments to the Fiducia Law identified by the project effective execution system, the cost to repossess is high and stakeholders. A draft is currently being reviewed by may ultimately deter financial institutions from using the Cabinet/Parliament. Fiducia Registry. In addition, all respondents to the survey indicated that the Ministry of Law and Human Rights’ FOCUS ON MOVABLES FINANCE PRACTICES sensitization campaigns had not yet adequately reached all IN THE FINANCIAL SECTOR relevant stakeholders. The World Bank Group’s previous experiences of supporting These findings suggest that although there’s been secured transactions reform in China and Vietnam had considerable improvement to the legislative and practical indicated that in order for the project to deliver meaningful framework for the use of movable collateral to increase results, secured transactions reform should be approached access to finance for the small-scale business sector in as a banking/financial sector initiative and not as a legal Indonesia, more work needs to be done to achieve a full- reform/registry project (China). Legal reform work can fledged best practice outcome. be complex and require long periods for implementation as well as additional resources for advocacy (Vietnam). However, in Indonesia it was clear that movables financing remained undeveloped due to an ineffective legal/regulatory environment and registry system coupled with a lack of industry and public knowledge. Regulatory improvements and strengthening the registry system were needed along with inclusion of support to financial institutions in product and service development, as well as awareness-raising activities with government agencies and the general public to promote movables-based financing. To assess what Indonesia’s financial sector needed in order to expand movables finance to under-served MSMEs, the World Bank Group held the Forum on Global Innovations in SME Finance on July 1, 2014, which was attended by commercial banks and Bank Indonesia. Follow-up discussions with a number of banks that participated in the forum confirmed that no technical assistance to lenders was needed to improve the practice of movables financing. The surveyed banks emphasized that focus should be given to modernizing the registry and improving the coherence of the supporting regulations to provide legal certainty. 7 INDONESIA: EXPANDING INDONESIA CASE AZERBAIJAN: STUDY ACCESS TO LEVERAGING FINANCE POSTAL FOR MSMES NETWORK THROUGH FOR SECURED FINANCIAL AND TRANSACTIONS REFORM SOCIAL INCLUSION RESULTS PARTNER & CUSTOMER TESTIMONIALS 1. Fiducia Online shifted processing to a centralized and online registry in 2013 from a decentralized manual The Ministry of Law and Human Rights process of 33 regional offices and 157 satellite offices nationwide. “The Ministry of Law and Human Rights has always been committed to improving public services, since the launch of 2. On March 15, 2016, Fiducia Online was accessible to Fiducia Online. To date, the system has been through a series all types of lenders including 14,000 notaries. In 2014 of improvements to meet the needs of the public. it was awarded one of the top nine National Public Service Innovations awards. The open accessibility could Fiducia Online is providing certainty and legal protection potentially earn one point in the indicator Getting Credit, for creditors and borrowers. MSMEs generally do not have Strength of Legal Rights for Doing Business 2017. land or buildings, the system will be particularly useful for creditors when extending financing to MSMEs using 3. Fiducia Online’s search function launched in 2015 movables assets as collateral. We hope that what we have allows anyone to conduct searches of the data stored in built and improved can contribute to economic growth in Fiducia Online databases, on the basis of name, identity Indonesia, where businesses increasingly have easy access of object, and number of certificates. This innovation is to financing.” critical to comply with the principle of publicly available information about secured transactions. This result has Bank Negara Indonesia (BNI) earned one point in the indicator Getting Credit, Strength of Legal Rights for Doing Business 2016. “The Fiducia reform enables the system to become a transparent and accountable instrument and very useful 4. Solid monitoring and evaluation tools for the Fiducia for creditors in extending financing to MSMEs. There is a Registration Office were successfully implemented, search feature that allows creditors to determine the status of assisting the development of comprehensive reporting the pledged assets, therefore, avoiding multiple creditors and mechanisms which allows the Government of Indonesia reducing the associated risks.” to better understand the types of registrations based on creditors, debtors, and types of objects. Asep Syarifudin, Owner, Meetra Outdoor 5. On a cumulative basis, as of December 2015 – Fiducia “Fiducia Online helps banks to check collateral of their Online held 298,044 non-vehicles financing registrations, prospective borrowers quickly; this provides certainty for facilitating $30.8 billion5 in financing for 212,205 SMEs. creditors and borrowers. We hope that with the improved In total, there were 19.3 million registrations of corporates, system, our bank would be able to reduce the risk and SMEs, micro-businesses, and consumers since the launch eventually reduce the applicable interest rate. We are now of the modernized online system in 2013, compared to able to pledge our inventory as collateral when we apply for 3 million registrations in total during the ten years of financing to our bank.” operation of the manual registration system. 5 In the case of syndicated loans, some loans may be registered multiple times in Fiducia 5 8 EXPANDINGEXPANDING INDONESIA: ACCESS ACCESS TO FINANCE TO SMALL-SCALE FOR MSMES THROUGH FINANCE FORBUSINESSES SECURED THROUGH TRANSACTIONS SECURED REFORM TRANSACTIONS REFORM LESSONS LEARNED To have committed sponsorship is critical. trips were particularly useful as they enabled the Ministry of Law and Human Rights staff to learn from their peers The results achieved in this project were largely due to and to see firsthand the experience of other countries in having a strong advocate and champion for the reforms order to apply the reforms in their own country. This in the Government of Indonesia, as well as having support helped the Ministry to make informed decisions strong support from financial partners such as SECO and also to convey a sense of knowledge and ownership and the Government of Japan who provided funding and of the process. For example, when the Ministry was actively participated in the project activities. The World presenting and leading the discussion at sensitization Bank Group partnered with the Ministry of Law and events, these events were productive and seen as beneficial Human Rights, which is mandated by law to manage the by the Fiducia Registry users. The World Bank Group Fiducia Registration Office. The Ministry acted as the was able to draw on its global experience and expertise secured transactions champion, leading and executing to ensure the client received best practice advice from the respective agendas with advice and support from the not only the Bank Group but also other clients around World Bank Group throughout the engagement. To expand the world. the use of the newly established financial infrastructure by a broader range of financial institutions for lending backed Continuously invest in your stakeholders. by movable assets, the Bank Group and the Ministry plan to continue their partnership with other relevant stakeholders Over the course of the project, the key officials in the – Otoritas Jasa Keuangan (or OJK, the Financial Services Ministry of Law and Human Rights relevant to the Authority of Indonesia), Bank Indonesia (BI), and the project kept changing, as is often the case in government Ministry of SMEs and Cooperatives – to increase access institutions. The individual sponsoring the project to finance for the under-financed MSME sector. changed multiple times, which required the project team to re-establish the relationship and re-sensitize the newly It helps to leverage emerging agendas and priority areas to introduced Ministry of Law and Human Rights project support desired reforms. sponsor. Having the dedicated legal and registry experts to continue working with the change in counterparts and A number of new regulations and agendas set by the keeping the strong relationship with the project sponsor was Government of Indonesia and its various public agencies the critical factor in keeping the project on track. Having and the financial regulators paved the way to key turning dedicated operational resources in the country (with points in the project’s progress. Following the Ministry banking experience) and global expert resources on-site of Finance Decree 130/2012, the Ministry of Law and at any time (with hands-on experience in running movable Human Rights set the Fiducia Registry modernization as collateral registries), helped ensure the appropriate level of its priority in 2012. OJK ran a series of sensitization events attention from executives within the Ministry of Law and on the Fiducia Registry in 2015, creating a platform for Human Rights, the financial sector, and the other relevant constructive discussions on the Fiducia Registry’s relevance stakeholders. to banking and non-banking financial institutions. The ambitious target of improving Indonesia’s Doing Business Adapt engagement to market realities. position from 109 to 40, set by President Joko Widodo, has provided a way to promote legal recommendations related While some practices in secured transactions reforms to secured transactions in a way that would not have been around the world show that such reforms should be taken possible before. It will remain important to continue as a banking/financial sector initiative and not as a legal liaising across the financial regulators and government reform/registry project in order for the project to deliver agencies in order to raise the profile and importance of meaningful results, in Indonesia, the opposite was true. the secured transactions reforms and to take advantage of The team chose to focus initially on the Fiducia Registry the momentum that other initiatives may provide for the modernization and the respective regulatory reforms as reforms. it was clear that in Indonesia, without a legal and sound registration infrastructure in place, any promotion of It’s good to strengthen capacity of the project champion. movables finance practices would not yield meaningful results with financial institutions. Repeated surveys of the From the beginning of the project, the team worked to help financial sector stakeholders throughout the project re- its partner gain a better understanding of the objective of the confirmed that the project’s adaptation of practices to the reforms under the secured transactions agenda. The study Indonesian market realities was the right course. 9 INDONESIA CASE STUDY AZERBAIJAN: LEVERAGING POSTAL NETWORK FOR FINANCIAL AND SOCIAL INCLUSION Spend time advocating and raising awareness amongst your stakeholders. In Indonesia, there was little public discussion about the role of a sound legal framework in promoting economic growth. Therefore, promoting access to finance through the Fiducia Registry required extensive discussions to educate various stakeholders about the benefit and impact of the reforms. For example, the financial sector regulators did not fully appreciate the importance of fiduciary reform as an economic development driver. Creditors still see the Fiducia as a cost that they need to avoid wherever they can rather than as a useful risk-management tool, illustrating the need to continue working with the financial sector; with law enforcement (police/bailiffs) who are still not aware of their role in secured transaction enforcement; and with end consumers who also need to be educated about consumer protection rights. In this context, the role of government in educating stakeholders and providing stimulus for the use of Fiducia is vital. Make sure to solicit feedback throughout the reform process. It is only through a combination of public events (the SME Finance Innovations Forum and a number of sensitization events hosted by the Ministry of Law and Human Rights and financial regulators) as well as one-on-one discussions with banks, multi-finance companies, and financial regulators, that the Ministry and the World Bank Group obtained comprehensive feedback on how beneficial the ongoing modernization of the Fiducia Registry was to its users. This feedback informed and contributed to the improvements in the registry and its enabling framework as the reforms progressed and continued. Meet your partners where they are. Government officials are often very busy, and this puts the onus on the project team to find solutions to engage with the project sponsor when possible. In Indonesia, the team was willing and able to meet the sponsor where he was and had time. There were times, for example, that the team members would ride with him to or from the airport when he traveled in order to get the face time and sign off that was needed for progressing. Their efforts highlight the success of keeping the project on track by being willing to go the extra mile when meeting with our partners. Mobilization of Institutional Investors to SME Financing in Emerging Markets 10 10 EXPANDING ACCESS TO FINANCE FOR SMALL-SCALE BUSINESSES THROUGH SECURED TRANSACTIONS REFORM WHAT’S NEXT? The World Bank Group and the Ministry of Law and Human Rights have supported notable improvements in the enabling environment and infrastructure for financial institutions to expand financing to SMEs backed by movable assets. Yet a few more challenges remain in scaling up and transforming the overall SME financing landscape, such as: • Recommended amendments to the Fiducia Law have just been sent to the Parliament for approval. This will be followed by a need to establish effective implementing regulations and respective functions in the Fiducia Registry; • Weak or absent enforcement of regulations around financing operations involving Fiducia. For example, regulation provides a sound foundation for creditors to repossess pledged vehicles without needing a court order on defaulted loans on the Fiducia basis, but law enforcement personnel are generally unaware of this regulation and very often protect the defaulted borrowers from creditors collecting the pledged assets; • Challenges in coordinating the various policies and initiatives to support MSMEs by a number of ministries and agencies of the Government of Indonesia sometimes lead to only partial and fragmented implementation of policies, and thus do not provide as much fundamental support for the secured transactions reform needed to increase the use of movable assets to access finance by MSMEs; • Access to finance for the MSME sector has not increased yet, and it may be argued that the Fiducia Registry’s sensitization campaign has so far only scratched the surface in a country with over 120 commercial banks, 1,600 rural banks, 200 multi-finance companies, and close to 10,000 savings and loans cooperatives. Only 3.7 percent of banks use Fiducia security to secure their financing, compared to a majority of non-bank financial institutions and some 99 percent of financing of motor vehicles. These remaining challenges form the rationale for the World Bank Group’s continued partnership with the Ministry of Law and Human Rights, Government of Indonesia agencies and financial regulators to expand finance for under-financed MSMEs. A second phase of the project aims to continue the capacity building of the Ministry of Law and Human Rights, and to inform and educate users and beneficiaries of the online registry to increase financing for MSMEs. 11